U.S. trade options in Asia

by Walter Lohman

President Donald Trump’s decision to withdraw from the Trans-Pacific Partnership (TPP) has created a great deal of uncertainty about American trade policy in Asia. The United States has been the leading rule maker and commercial power in the region’s trade for many decades. What it does over the next four years – and how its partners respond – will go a long way toward determining how the geo-economic picture in the Pacific develops.

In terms of policy, there are three ways the new U.S. administration could go.

Enforcement first

The most likely scenario is a defensive approach reliant on a much more vigorous use of conventional trade remedies. Commerce Secretary Wilbur Ross strongly hinted at this in his confirmation hearings, where he said that countries that do not “play by the rules” should be “punished and severely.” He identified antidumping/countervailing duty (AD/CVD) measures as the best way to do this. Since Mr. Ross was confirmed, the Office of the U.S. Trade Representative has released its annual “Trade Policy Agenda,” which highlights strict enforcement of AD/CVD laws, as does the Trump administration’s preliminary 2018 budget proposal.

China appears to be the main target for this activity, but it need not stop there. Asian countries already figure prominently among AD/CVD cases. China stands head and shoulders above the rest, but taken as a whole, the region accounts for almost three quarters of such procedures globally (See Table 1). Now that the Department of Commerce is likely to be even more favorably disposed toward industry complaints, one can expect an increase in the number of antidumping petitions filed.

The administration is also likely to initiate cases on its own – a process Mr. Ross himself endorsed as a means of helping small businesses cope with foreign competition.

AD/CVD cases require evidence of products being sold at prices below fair market value. Another remedy mentioned in the White House “Agenda,” safeguard measures, requires no such finding. The government need only demonstrate injury from imports to take remedial action on behalf of U.S. industry. Perhaps as a prelude to such action, President Trump signed an executive order on March 31 mandating a study of bilateral trade deficits to be submitted within 90 days. The U.S. last imposed safeguards in 2002, on Chinese steel.

Bilateral deals

Under the first scenario, the administration would focus entirely on enforcement. A second, less likely, scenario would involve the same emphasis on antidumping and protection against import “surges,” while adding positive trade initiatives to the mix. President Trump and senior government officials have frequently expressed interest in pursuing bilateral free trade agreements (FTAs). Given the scope of U.S.-Japanese trade and the close political ties between the two countries, Japan would be a logical first partner for such a deal.

A comprehensive agreement with Japan offers the additional advantage of salvaging some of the commitments made under TPP. If a deal with Japan is left open for other TPP members to join, it might also allow the U.S. to recoup the economic and strategic benefits it forfeited by withdrawing from TPP. The administration’s number one trade priority – renegotiating the North American Free Trade Agreement – presents a similar backdoor opportunity to reconstitute a broader trans-Pacific deal.

China and four other Asian countries lead the list for antidumping and countervailing duty procedures initiated by the United States at the behest of domestic producers (macpixxel for GIS)

Other possible initiatives could include a trade pact with Vietnam, perhaps the biggest loser in TPP’s demise. In fact, the Vietnamese appear even more open to cutting a bilateral deal than the Japanese at present.

Another candidate for an FTA or bilateral investment agreement (BIA) is Taiwan, since Washington is aware of the strategic advantages to be gained from supporting the Taipei government’s autonomy from Beijing. China itself could be an attractive partner for an investment treaty, since it would potentially lock in market access for American companies and address some sore points for U.S. investors, including forced technology transfer and the privileged status of Chinese state-owned companies.

The president has also made a priority of renegotiating deals already in place. Judging by the testimony from his nominee for U.S. Trade Representative, Robert Lighthizer, the U.S.-South Korea Free Trade Agreement (KORUS) is a prime candidate. While the U.S. enjoys surpluses with two of its free trade partners in Asia – Australia and Singapore – its trade deficit with South Korea has grown since KORUS went into effect in 2011. So even in a scenario in which the U.S. is pursuing FTA’s in the region, it may be simultaneously involved in a contentious renegotiation of its most significant FTA outside of North America.

Punitive tariffs

The least likely scenario revolves around President Trump following through on campaign threats to impose punitive tariffs on imports. To do so, he could resort to several rarely used legal authorities, according to a report by the international law firm White & Case. Among them are Section 338 of the 1930 Tariff Act, which allows for the imposition of hefty duties on countries that have “discriminated” against American exports; the Trade Expansion of 1962, which contains a provision for limiting specific imports for reasons of national security; Section 301 of the 1974 Trade Act, which authorizes the president to retaliate unilaterally against unfair trade practices; and the International Emergency Economic Powers Act of 1977.

The use of any of these authorities to impose penalties on trade partners would be hotly contested by the U.S. Congress, the federal court system and the World Trade Organization (WTO). This makes appeal to them unlikely, but by no means unthinkable. In fact, the president’s own “Trade Policy Agenda” endorses using the measure with the clearest legal grounds, section 301, even though it is very widely regarded as subsumed by American treaty commitments to the WTO.

As for the WTO, there is an open question on how far the Trump administration will go in defying it. The possibility of an open challenge has been most prominently raised in connection with tax reforms proposed by the Republican leadership in the House of Representatives – specifically, the creation of a so-called Border Adjustment Tax (BAT).

Basically, a BAT would entail a tax on imports that would not be applicable to American exports. Its application would resemble that of a value-added tax (VAT) and be part of a reform of the U.S. tax structure intended to incentivize domestic production.

Many economists support the proposal and maintain that, like VAT, it would have no impact on trade. The House Republican leaders assert that the measure can pass muster at the WTO. However, a border adjustment tax is not a value-added tax, which has long been regarded as WTO-compliant, and therefore would be open to challenge. President Trump has endorsed the Republican plan, but has continued to refer to punitive measures, often conflating the two.

Choosing any of these options – punitive taxes or tariffs, a resort to Section 301, or a border adjustment tax – may invite an adverse ruling from the WTO, raising the question of whether the Trump administration would dare to pull out of the organization entirely. For the moment, this seems highly improbable, given the complexity of the legal case the president would have to make, along with the broad support for WTO membership in Congress and the business community.

Asia’s options

Any assessment of how Asian countries might react to these scenarios must start by acknowledging that they have a wide array of economic partners.

The U.S. has a very prominent economic role in the region, but it is not predominant. For many Asian countries, it is not even the leading trading partner. In South Korea, the Americans are vastly out-traded by the Chinese. In Southeast Asia, the European Union and Japan are both bigger investors. Singapore and South Korea both invest more in China than the U.S.

East Asia has no reason to wait on U.S. trade initiatives, since it has plenty of other options – on top of the dozens of agreements already in place in the region. Originally a proposal of the Association of Southeast Asian Nations (ASEAN), the Regional Comprehensive Economic Partnership (RCEP), has just finished its 17th round of negotiations. Talks on a China-Japan-South Korea free trade agreement are also well advanced. The EU has agreements pending with Japan, Singapore and Vietnam, and has recently reasserted interest in a multilateral agreement with ASEAN.

There is even a limited prospect that TPP will move forward without U.S participation. China, meanwhile, is proceeding with its own regional initiatives, including the immense One Belt, One Road infrastructure program and the Asian Infrastructure Investment Bank – both of which have stirred wide interest.

In short, although Asian countries crave access to the U.S. market, the U.S. lacks the leverage to reshape the regional order by enforcement alone, as suggested in the first scenario.

Precarious presence

When the U.S. exploits Asian interest in a coordinated way, it can often achieve good results. This strategy hinges on finding alignment with other Asian countries, like Japan, that share Washington’s interest in an open, rules-based economic architecture. This is how TPP came together.

Unilateral pressure, on the other hand, is more likely to alienate economic partners and encourage them to pursue other opportunities. The region will turn to its own forums to set the rules. Over time, the result will be to shape supply chains and foster new economic relationships that marginalize the U.S.

Scenario Two would at least leaven the enforcement-based approach. It would provide a constructive outlet for economic partners like Japan, who may have strategic reasons beyond economics to prize close relations with the U.S. The region would continue to outgrow American economic leadership, but at a pace that allows the U.S. to stay relevant and perhaps even reassert its influence in the future.

The third scenario of full-blown punitive measures, in defiance of the WTO, would result in a precipitous decline in U.S. influence. The American presence in Asia – across all dimensions of national power – has been a crucial stabilizing factor. Its abrupt removal would give the region too little time to adjust and build new support networks. In the worst case, East Asia will devolve into ever greater mercantilist competition that could eventually breed an armed conflict.

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Source: Geopolitical Intelligence Services

2017-04-13T13:20:36+00:00

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